OMAHA (DTN) -- The farmer-owned CountryMark cooperative and fuel refinery is caught in the middle of the small-refinery exemption controversy.

The company operates in Indiana, Illinois, Michigan, Ohio and Kentucky -- most of its customers at more than 100 retail stations are farmers and rural communities that have benefitted from the commodities markets bolstered by the Renewable Fuel Standard since 2005.

It is -- by EPA's definition -- a small refinery producing 75,000 barrels per day or less.

In 2017 and 2018, CountryMark received small-refinery waivers to the RFS.

It is one of the few refiners owned by farmers, and small-refinery waivers made CountryMark's business more viable in 2017 and 2018.

On the other hand, the refiner is a big supporter of the RFS. The company blends as much ethanol and biodiesel as possible and fulfills the rest of its legal obligation through buying biofuels credits.

Kent Hoffman, an Indiana farmer and CountryMark board member, told DTN the refiner's need for waivers started in 2015 when its bottom line took a hit when crude oil prices dropped. Yet costs to comply with the RFS continued to rise, he said.

According to the U.S. Energy Information Administration, lower crude oil prices led to a decline in U.S. production that began in the second quarter of 2015. By the end of 2015 prices dipped to below $40 a barrel -- the lowest price since 2009.

The price of renewable identification numbers, or RINs, for all biofuels categories in 2015 remained mostly below $1 throughout the year. The highest price for any RIN in 2015 was $1.13 for a D3 cellulosic RIN on July 27, according to EPA's database.

In 2016, the price of D3 RINs spiked to a high of $2.35 on Dec. 12, while the prices of other RINs ranged from 52 cents to $1.10 throughout the year.

CountryMark's RFS compliance costs ballooned to more than 350% of profits in 2016, Hoffman said.

Refiner costs for natural gas to run the plant and maintenance was about $18.1 million, employee costs came in at around $20.4 million, he said.

The costs to comply with the RFS, however, topped them all at about $22.9 million.

"Over the next five years, we're projecting $70 million for compliance costs," Hoffman said.

The refinery started as a gusher well discovered on farm ground in the southwestern tip of Indiana in the 1930s.

The farmers who owned the newly discovered oil decided to cash in, so they built a 2,000 barrel-per-day refinery near Mount Vernon, Indiana. Today, it processes about 30,000 barrels per day.

The CountryMark refinery brings to market about 450 million gallons of finished fuel products each year to farms, fleets and families. The refiner is owned and operated by CountryMark's farmer cooperatives.

WAIVERS NECESSARY

Matt Smorch, CountryMark vice president of refining and logistics, said the process to apply for a waiver isn't easy but sometimes necessary. The EPA asks companies for a lot of detailed financial information, so a waiver isn't granted automatically.

Because CountryMark has received waivers retroactively, he said the company is allowed to un-retire RINs it has on hand, even though it met its RFS obligation through blending and buying RINs throughout the year. Un-retiring RINs, he said, has led to more RINs flooding the market. That has created lower demand and lower prices for RINs.

When it comes to CountryMark's un-retired RINs in 2018, however, Smorch said the law allows the company to use just 20% of those credits for 2019 compliance.

Since RINs prices have fallen, the company may not be petitioning EPA for a 2019 waiver.

"Depending on how the rest of the year comes in and where the markets are at, and if our RFS compliance costs are not very high, with the way everything is this year we probably won't apply for an exemption," Smorch said.

"It wouldn't pass the red-face test."

The company supports the RFS because it understands its importance to the rural economy and its cooperative members, he said.

"We're a farmer-owned cooperative so we blend as much in our products that we can, and we incent our members to blend," Smorch said. "Even with everything we do through blending, we are still short."

The company blends 60% to 65% of its obligation and fills the rest through RINs purchases.

"We have to go out and buy credits," Smorch said. "Typically we buy biodiesel and sell it at the diesel price. That's part of our cost. We don't own retail. We have branded stations but we don't own them. With the way the RFS is set up today, mandates are so high that it's hard to meet in the marketplace. If we fall short of blending, the waivers are a fallback.

"Is applying for an exemption something we will do every year? Probably not. It really is there for a safety valve. We're very supportive of the RFS. We're in rural Indiana, our refinery is in the southwest part of the state. This is what saving rural jobs looks like."

BIOFUELS DEMAND

Ethanol and biodiesel interests contend 85 waivers granted by the EPA has destroyed biofuels demand to the tune of about 4 billion gallons since 2016.

President Donald Trump reportedly is ready to make a peace offering to farm country at some point, to alleviate the sting felt in rural America where agriculture interests have doubts about where the president stands on the RFS.

Smorch said he is unconvinced small-refinery waivers have led to reduced demand for biofuels, especially since the exemptions were granted retroactively.

That's because, as an example, CountryMark already blended as much biofuels as it could and bought RINs throughout the year to comply with the RFS. The company would like to blend more but doesn't have the ability.

If CountryMark decided it was going to meet its RFS obligation only through blending, it would face the daunting task of having to blend ethanol at a blend rate of greater than 12% of all of its gasoline and sell all diesel fuel at greater than B5, or a 5% biodiesel blend.

CountryMark, however, is expanding its fuel offering of E15 and continues to look for other biofuels opportunities.

Hoffman said the ability to ask for waivers is important to CountryMark's business.